Gabelli & Co.’s Barry Lucas is still bullish on broadcasting. But its recovery, he feels, will be driven far more by the return of auto advertising than by new sources of revenue — retransmission consent, mobile DTV and local online media.
Barry Lucas of Gabelli & Co. is among the cadre of sell-side securities analysts who dissect the finances and operations of legacy media — broadcasting and cable — and advise investors on whether to buy, sell or hold. He does it by going beyond the balance sheets and P&Ls and tracking the trends that are rapidly reshaping the business.
In this interview with TVNewsCheck Editor Harry A. Jessell, Lucas says he is still a believer in the TV broadcasting business despite its recent troubles and expects it to bounce back over the next few years. And the recovery, he says, will be driven far more by auto advertising than by new sources of revenue — retransmission consent, mobile DTV and local online media.
Commenting on the deal of the moment, Lucas doesn’t think Comcast’s acquisition of NBCU makes much sense for Comcast, but if the cable operator goes ahead with the deal and expects to get Washington’s approval, it’s going to have to “promise, cross their heart, hope to die” that it will not abandon the NBC affiliates.
For the record, Lucas notes that GAMCO Investors, an affiliate of Gabelli & Co., owns more than 1 percent of three major station groups — Belo, LIN and Sinclair — and currently has buy recommendations on each.
The edited transcript:
What’s your outlook for the TV station business in 2010 and beyond. Are you optimistic, pessimistic?
I would say I’m reasonably optimistic about 2010. We’re going to have a fairly robust off-year election that should help tighten up inventory, which would be helpful. We should also see a modest return of automobile advertising. The loss of it was so disruptive and destructive at the end of 2008 and 2009. And, then, if we get a real economic recovery, we may get a more robust return of auto in ’11 and ’12.
So you don’t see anything broken about this business? Anything fundamental?
If you’re asking what the risks are, I would say ratings have not been terrific and largely reflect media fragmentation. I don’t see that trend really changing. On the other hand, if you have the right show, you’re still going to draw an audience.
We had pretty good ratings for the World Series. It’s one show that the people wanted to see. If you’ve got high-profile, scripted product, people are still going to come around.
But fragmentation, different forms of audience delivery like Hulu, all pose meaningful challenges to the station business.
Would you say it’s a fundamentally sound business for at least the next three to five years?
I would say yes. I don’t think that viewership patterns are going to change so materially over the next three to five years that it would significantly damage the business.
A lot of station groups leveraged up to buy stations over the first half of the decade and put themselves in tough financial positions. Are they out of the woods yet?
I wouldn’t say it wasn’t just station groups. There are a number of media companies that went out and bought assets over the last couple of years and not everybody is out of the woods.
You have seen a fair amount of refinancing this year. Gannett and Belo just completed refinancing. Sinclair did a refinance. What’s happened is, the bond market, which was closed, became much more accommodating and then a number of companies took advantage of the opportunity to extend maturities, amend credit agreements. Those companies are in pretty good shape through, depending on the terms of the credit, to 2015, 2016, 2017.
You say some are not out of the woods. Do you expect any of these companies to file for bankruptcy?
I don’t think so. Unlike the bankruptcy filings that we’ve seen in the past — Young, Granite — the companies we’re talking about here are generating free cash. The banks, which are kind of the prime movers in rigging defaults, don’t necessarily want to own these assets.
So, if you’re generating free cash, if you’re meeting your current interest obligations and amortizing some piece of the debt, I don’t think that the banks want to own these assets. They’d like to figure out ways to amend the credit agreements.
The station trading market is dead. Do you see that picking up at all in 2010? I presume there are sellers, but I don’t know if there are any buyers.
Most of the managements that you speak to are really not interested in adding to station portfolios and borrowing more money to do so. A number of individuals have said they would like to have more duopolies, but I don’t see a lot of deals. I mean, what was the last deal? Perry Sook managed to buy the Jacksonville CW from Media General.
Yeah, not really a big deal.
Right. I don’t see anything happening in Congress that would really accommodate larger ownership transactions.
So you’re not expecting any kind of relief on media ownership restrictions in the near future?
No. We’re just looking at the shape of the administration. It’s hard to see that coming to fruition.
Is there enough money in retransmission consent to put TV broadcasting back financially where it was three or four years ago?
I don’t think so. It’s certainly helpful, but it’s not enough of a swing factor. I’ll repeat what I said earlier: It’s largely dependent on auto advertising. We need a healthier domestic manufacturing environment for the Big Three. You need good competition from the foreign imports and you need those dollars helping to really soak up inventory. A number of broadcasters have done a good job finding new business, but replacing auto has just been a difficult challenge.
Do you think getting a buck or two a sub is a pipe dream on retrans consent?
Over what period of time?
Let’s say the next three or four years.
I don’t think you’ll see that, no. Forty to 50 cents would be as much as I could really see. Right now, Time Warner Cable is starting to push back on cable programming costs and ultimately they’re going to draw a line in the sand on retrans payments as well.
I just find it conceptually difficult to think the fees could go from current levels, which we guess are 25-30 cents per sub, per month, to a buck. No. Some kind of inflationary escalator is how I would see retrans moving. I don’t necessarily see it moving up as a step function.
Whatever the amount, will stations have to share it with the networks?
I understand both sides of the argument. If Les Moonves and company can drive incremental revenues by negotiating for all the CBS affiliates, maybe they’re entitled to it. That’s a tough call. I mean it is really a tough call.
In its third-quarter conference call, Fisher acknowledge that it is paying ABC programming fees under its new affiliation agreement, although it made the point of saying the fees were not tied to retrans.
Everybody’s going to put their spin on it. We’re going to see something along those lines, if it helps pay for high-profile programming. You’re going to see some inventory trades as well. Ultimately, you may see those same networks programming fewer dayparts and turning them back to the station groups.
Would you like to see NBC turn back 10 o’clock to the affiliates?
Oh, I don’t think anybody is too happy with the progress or lack thereof [of Leno] so far. I don’t know if that’s the answer because the issue would still be your news lead-in. I don’t know that a self-produced or syndicated product will improve the position that they already have with Leno.
Some of the affiliates — Boston most famously — have talked about putting the news on at 10 o’clock.
That’s an alternative.
Is there any more cost to take out of the station business? I know that the stations have been working hard over the last 18 months to cut wherever they can.
I think a lot of that is over and actually some may come seeping back. You just can’t keep decent talent with no raises and no bonuses ever. On the other hand, you may see some downward pressure, particularly for syndicated products.
But in general you don’t believe stations ought to be trimming their operations even more?
You can continue to streamline back-office functions, implement hub stations and use technology to gain efficiencies. There’s always, at the margin, something that can be done. If managers are looking at the business model more carefully and going back over expenses to see what’s truly needed, I certainly have no objection to that. But it would be difficult from here to see material decreases in operating expenses.
Are you impressed with the broadcasters’ talk of mobile DTV as an important new source of viewers and revenue?
It’s really hard to envision that as an important source of new revenues until we have a business model. Is it going to be subscriber based? Is it going to be advertising based? Who’s going to share in the pie? There are a fair number of issues between now and when those first checks are cashed. Can it be meaningful? Yes. Can it be double the size of retrans payments? I’m not sure about that.
Should broadcasters be seriously considering the FCC’s cash-for-spectrum proposal?
I don’t know if it’s the FCC per se or [FCC broadband policy chief] Blair Levin’s. The more vocal broadcasters have stated quite vociferously and very publically that they have no interest. Now, other, more marginal broadcasters — stand-alone CWs or My Nets — may not have a choice. I don’t know. We have just gone through this protracted and expensive digital transition. So I would think most broadcasters would not be enthusiastic about going through another.
Then we can get to the philosophical argument. Why is the iPhone more entitled to spectrum than local broadcasters? I don’t know that there’s a public interest mandate for Apple.
What about the local online business? TV stations have a great opportunity to dominate that space. Is that a place they can recover lost revenue?
Well, again, that’s a marginal opportunity. I don’t see it as a huge opportunity and it requires a pretty good-size commitment. You have to be committed to producing a very good Web site that’s going to compete with a lot of other Web sites in order to get the traffic and then you need to figure out a way to monetize it.
Let me ask you about the big deal of the moment, which is Comcast’s purchase of NBCU. Do you think that’s a good bet for Comcast?
Personally, no I don’t think so.
Because I don’t know that it completes a strategic imperative for them. The original deal that they tried to do a couple of years ago with Disney was probably a better deal from a strategic standpoint. To the extent that it works for Comcast, it works somehow financially, not necessarily strategically. Assuming there is a deal, it’s going to be tied up for a bit [in Washington] and I don’t know how to handicap that.
In a world where all distribution is uncertain, isn’t it important to have a lot of content?
Yes, but you tell me: What is the content that is so important that Comcast is getting from NBCU?
They have some fairly successful cable networks and a big library.
Is it important to have content? The answer is yes. Is this such a great content gold mine that Comcast absolutely must have it? I’m not sure.
Let’s say the deal does goes down. What effect does that have on TV stations in general and the NBC affiliates in particular?
Well, generally what will happen is that Comcast is going to have to jump through a fair number of hoops to get this deal done, which could include putting the stations in some sort of trust even though they really can own the stations. Comcast will probably have to promise, cross their heart, hope to die that the NBC television network is going to remain free to air.
And distributed over the affiliates.
Yes. They are going to have to be very careful with people inside the Beltway who potentially could raise a fire storm. I’m not sure legally what the real roadblocks might be, but it is certainly going to get the attention of a fair number of legislators.
So why would they have to be put the stations in trust?
I don’t see Comcast wanting to own local television stations. They could sell them, but, again, I don’t think there are any buyers for big O&Os right now.
Well it’s been suggested to me that they could embrace the idea of being a broadcaster and drive retrans — try to set a higher standard for retrans fees and put more money into the network. Do you don’t think that’s a possible scenario?
I would say it’s a possibility. I wouldn’t necessarily put a high probability on it. I would say this: Brian Roberts is a very, very smart guy and he and Steve Burke have a reasonable degree of knowledge and expertise about the station business. I’m not trying to minimize what Brian is trying to do and or to cut off any options that they may see, but it’s still going to be a challenge.